Preheat your oven to 170ºC (340ºF) and line two 20 cm (8-inch) round baking pans with parchment paper.

In a food processor, blend the unsweetened shredded coconut until finely ground. In a large bowl, sift together the processed coconut, all-purpose flour, baking powder, baking soda, and salt.

Cream together the room-temperature butter and granulated sugar until light and fluffy, about 3-4 minutes.

Add the eggs two at a time to the butter-sugar mixture, mixing well after each addition until smooth, about 2-3 minutes.

Gradually add half of the dry ingredients, then the sour cream, coconut milk, vegetable oil, vanilla extract, and coconut extract. Mix until just combined before adding remaining dry ingredients.

Divide the batter evenly between the prepared pans and bake for 20-23 minutes, or until a toothpick comes out clean.

Remove cakes from the oven and cool in the pans for 10 minutes. Transfer layers onto a wire rack to cool completely.

In a stand mixer, cream the softened butter until smooth, then gradually add cream cheese and powdered sugar until smooth.

Assemble the cake by placing one layer on a serving plate, spreading cream cheese frosting on top, and adding the second layer. Frost the top and sides of the cake.

Sprinkle toasted coconut flakes on the top and sides of the cake for decoration.